Lost Its Marbles: First Marblehead Loses Out On Student Loans

On Thursday, August 21 after-hours, First Marblehead Corp. (FMD) reported a Q4 loss of $0.57 per share or $56.7 million vs. positive earnings of $0.83 per share or $78 million. Analysts expected a loss of $0.39 per share, widely missing expectations. Revenue fell from $197.1 million to negative $40.4 million a year ago. Shares fell nearly 9% ahead of earnings and also fell nearly 9% after-hours. On Friday, shares opened at $3.35 and closed up $0.6 or 2% to $3.67. Shares are down nearly 85% since last year.

Loan volume fell to $268 million, down 66% from $792 million a year ago, due to massive illiquidity in the financing market and a nearly non-existent demand for student loan-back securities in the midst of a larger credit crisis. Without this demand, FMD was unable to package securities for the past 9 months. Also, the value of FMD’s receivables declined $532.9 million after adjustments were made. As a result, FMD cut 500 jobs in May, over 50% of its workforce, in an effort to save $200 million a year.

In April, The Education Resources Institute, or TERI, which guaranteed billions in private student loans, filed for bankruptcy protection after a sharp increase in student loan defaults. As a result, Bank of America (BAC), FMD’s second-largest customer, cut off its business with the company. In 2007, BAC accounted for 15% of FMD’s total revenue of $881 million. Obviously, this has contributed to a large degree for the wide loss.

In 2007, direct to consumer loans comprised 78% of total securitized loans and school channel loans comprised 22%. JP Morgan (JPM) accounted for 29% of FMD’s revenue, its largest customer. I expect intense competition from SLM, WFC, and other private student loan market components to continue to erode FMD’s large position in the industry. The credit crisis will continue for an unknown number of years, but secondary effects will negatively impact FMD for the years to come, given that FMD still remains operational.

On Monday August 18, FMD announced that Goldman Sachs (GS) completed a $132.7 million cash investment in the company. In December, Goldman Sachs Capital Partners fund agreed to purchase $59.8 million in convertible preferred stock as well as $200.7 million in common stock. That $200.7 million figure was cut to $132.7 million because of the large decline in the value of FMD’s shares. Goldman also agreed to provide a $1 billion warehouse facility, but FMD declined. Goldman Sachs’ private equity arm currently owns over 13.1% of FMD with a total investment of $192.5 million.

Furthermore, FMD announced that CEO and President Jack Kopnisky will resign on August 31. He will be replaced by Daniel Meyers. Remember that three years ago Mr. Meyers resigned for unethical practices (violating FMD’s ethics policy as determined by the board of directors), specifically by giving gifts worth $32,000 to a former employee of a major client. Interesting?

Currently, 3 analysts publish recommendations on FMD with 2 “Hold” ratings and 1 “Sell” rating. FBR maintained a “Market Perform” rating and a $4 target price. The firm noted that “FMD is shifting toward generating fees via providing origination and marketing services to lenders”. Sandler O’Neill & Partners maintains their “Sell” rating.

For the entire fiscal 2008 year, FMD reported a loss of $235.1 million or $2.46 per share vs. positive earnings of $371.3 million or $3.92 per share. Total revenue for the year was negative $28.4 million vs. positive revenue of $881 million a year ago. FMD plans to host a conference call in September for investors and analysts.

FMD hit a high of $57.56 on January 7, 2007 and never saw that level again. Currently trading at $3.62, the stock sits near all-time lows. FMD re-entered in a trading range since August 18 and remains in a consolidation area. A breakout above $5 would be considered bullish and a breakdown below $3 will be considered bearish. Otherwise, FMD will remain in consolidation between $3-$5 for the short-term.

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